How the game investors at Signia Venture Partners have steered into VR

Rick Thompson has made a lot of good investments over time which have generated around $6 billion in returns, roughly speaking. He is knowledgeable about games, as he is the former chairman of Playdom, which Disney bought for $763 million in 2010. And his partner Sunny Dhillon has also specialized in game investments and he is now carving out time looking at virtual reality and augmented reality startups.

While Thompson and Dhillon are bullish on games for the long term, they see the wisdom of investing during the right part of the cycle. Right now, it’s pretty hard to invest in mobile games because it takes so much advertising spending to stand out. That’s why they’ve followed the patterns of many game developers themselves and looked for “blue ocean” opportunities, where the waters aren’t bloody with too much competition.

Signia recently raised a second fund — $85 million worth — and the team expects to put a lot of it into virtual reality startups. But the firm will also put money into startups that fit its themes of mobility, like self-driving cars and data analysis. I recently sat down with Thompson and Dhillon for an extended conversation about investing in games and VR.

Here’s an edited transcript of our conversation.

Rick Thompson: There are windows of opportunity in new platforms, which is pretty exciting, either as an entrepreneur or as an investor. Picking those platforms is important. Facebook, we were very lucky that Disney liked us. I don’t think we would have survived another year, frankly.

GamesBeat: Because of that transition to mobile?

Thompson: With Facebook it was really a deathtrap. Fortunately mobile allowed a lot of people another escape route, another chance. For those who were able to make it. Some of the Flash programmers and people who were really stuck on Canvas, they had a tough time with it. Obviously Zynga suffered for a long time with legacy Facebook business.

Every turn of the technology crank, there’s a new center of gravity, where things seem to be able to give lift to new businesses. Sunny was smart in thinking about VR a couple of years ago. “This is something that’s going to be important for the long term.” He built his brand, essentially, with that as a cornerstone. It’s not only VR, but I think he’s going to make a 10 to 15 year career on VR as a focus. That was a good choice.

Sunny Dhillon: We’ve seen VR, AR, MR, all the different acronyms you’ve written about, that we hear about at conferences, that we write about ourselves, that we’ve seen — we’ve seen the speed of progress between first, second, to present-day iterations, and it’s been really impressive.

An interesting opportunity that we wrote about with you was what Pokemon Go was and wasn’t. It was commonly lauded as the first major iteration of AR. I argued otherwise, saying there was no real-time environmental depth mapping to make intelligent insinuations as to where Pokemon should be relatively in the real world, outside of location-based premises. What it did was open people’s eyes to using their mobile device as a window for digital overlay into the real world. That is pretty significant.

Educating the population en masse that using mobile devices for viewing, especially when it comes to depth-sensing cameras becoming commonplace, it’s cool to — you’d be able to put this over Rick’s table now and see an animation of cyclists from the Tour de France or whatever. You and I could sit here and have a live Jedi battle on this table. Whatever the use case might be, this is a very interesting near-term monetizable opportunity using AR on mobile devices. This is a particular area of interest right now, which I think is particularly relevant for you and I given our Pokemon Go discussions.

GamesBeat: Some people were thinking that if you still target the mobile market, you can have an outsized success compared to going early into VR and targeting a smaller base. If they had a chance for a billion users and they got that….

Thompson: Your answer is probably “have your cake and eat it too.” The VR companies we talk to have a mobile strategy, a piece to it that is mobile.

GamesBeat: Like the Gear VR strategy?

Dhillon: Amongst others — Daydream, Gear VR, Xiaomi. Whoever’s coming out with the latest thing. Mobile is part of it.

Thompson: It has to be part of the customer acquisition, at the very least.

Dhillon: Having cross-platform play, especially for multiplayer — all these companies — not to knock them, because everyone out there pushing the boat out to sea for VR, I’m a big fan — companies that raised significant venture dollars trying to own social as a stand-alone product, whether trying to re-create Second Life or re-create a basic hangout experience — this year at Oculus Connect, there’s a legitimate threat from the platform disintermediating them, making them obsolete with avatar systems and other social functionality.

GamesBeat: Facebook’s doing it.

Dhillon: High fidelity VR chat, all that other stuff from companies in the same space. The point I’m making, when it comes to having cross-platform, mobile has to be part of that play, but even within PlayStation VR, eventually Xbox, Rift, and Vive, having cross-platform is important for social. Including mobile being a part of that.

Thompson: There’s almost no technology work to do that. It just means you don’t sign exclusive deals with platforms.

GamesBeat: What is your view of games themselves? My view has been — I write about games. I cover them. They always change. They move from one platform to the next. I cover old platforms and new platforms too. And yet I always feel like, whatever happens to platforms, games will continue. Games will still be an interesting market to write about and focus on. I’ve detected a different view among traditional VCs, where they viewed games as a finite opportunity in time. Maybe social games and then mobile games, but now games are done. Let’s move on to something else like Uber or whatever unicorn of the moment. It feels to me like a lot of people came into games, saw the value, and then left.

Thompson: They’ll be back. They push through business cycles. It’s hard to make money on mobile now. Almost no value is tangible beyond the duration of the hit, which is unfortunate. Multiples of EBITDA — we were selling companies for seven times EBITDA. Okay, this is a hit, it has a lifespan. Basically it’s almost pricing it to discounted cash flow. That’s not a good place to invest. I couldn’t believe — with Cie Games, we were at seven times EBITDA and we had to take terms that included risk of holding stock and all those things. We did the deal. That was our best offer.

GamesBeat: In that case, have you encountered times when the smart move is to get out and stay away for a while?

Thompson: Or go quiet. Particularly with regards to specific platforms. But the times to get in are when there’s something disruptive happening, in terms of new technology, new platform, new areas that existing players don’t understand. EA was fortunate that they didn’t really understand Facebook. [laughs] By the time they got it the party was over. Good for them.

Dhillon: Similarly — you and I have also discussed this, maybe a year or so ago. When we’re seeing as much licensed IP out there, games rising to the top of the charts with existing branded content as the hook, the user acquisition hook, you’re splitting royalties the same way you’d be splitting something with a publisher in the past. When it gets to that phase in any platform for games – where licensed IP is a representation of maturity — when we’re talking early stage VCs, not the big giant Sandhill guys, it’s a sign that it’s time to start looking elsewhere.

GamesBeat: It means it’s more of a big company’s market than a startup’s market.

Dhillon: Yeah. They’re the ones that can pay the up-fronts.

Thompson: The problem with console in the ‘90s was a EA and a few other people controlling the endcaps. That’s what’s happened now with the App Store. It’s hard to crack into that without relationships.

Dhillon: Are you going to download an Avengers app with Marvel IP or a random ninja thing?

Thompson: Will you even see random ninja? It’s just invisible.

Dhillon: Using mobile games as part of a larger trans-media strategy for major intellectual property is what we continue to see right now.

Thompson: I don’t know that I would invest in a mobile game as much as video and chat and excitement and events and watchability.

GamesBeat: The spectator or esports angle to the game business, then?

Thompson: Yeah, where the game is probably off to one side. We’ve talked to a VR gaming company that we’re very interested in.

GamesBeat: I think the interesting thing about you guys is you still choose to retain the gaming knowledge, even though sometimes you go quiet and the market isn’t necessarily something you’d invest in. Whereas a lot of the other companies, they lose their expertise in gaming and move on to the next thing. If they come back into gaming, they’re realizing too late that they have another opportunity.

Thompson: For larger, established firms that have multiple practice areas, they have to get things through the partnership. [laughs] We see in a few areas, the partnerships are just allergic. Guys say, “I can’t even bring it to my partners. They don’t want to listen.” That’s probably the case with mobile gaming. VR is different. I suspect that when the time comes, you’ll see companies have some investments in mobile.

GamesBeat: Digi Capital’s recent quarterly report said that the thing they notice that was different about this third quarter was the bulk of the investors were mainstream, traditional VCs. 65 percent were mainstream, 20 percent were corporate, and the rest were other investors.

Dhillon: The corporate investors have been stepping up big time. You have Intel, Qualcomm, Samsung, Nvidia, they all have vested interests in pushing hardware out to market. The headsets, I think Oculus announced $250 million as its content investment since inception, with its grants through Jason Rubin’s studios team. Subsidized or vested-interest investments from corporate or the headsets themselves will continue while we see the ramp-up of hardware.

Thompson: Is any of that $250 million unrestricted grants?

Dhillon: None of them are equity investments. There are certain exclusivity ties that come with the money, but they’re different. They’re not uniform across each production. I think Playful, the guys who made Lucky’s Tale, got something like $20 million at the outset when they were building the first game.

Where you can limit content risk with game designers, programmers, and so on who are able to develop games within particular archetypes – MOBA, first-person shooter, RTS, action-RPG — that have proven they can deliver products multiple times within budget and on time — they understand the game design elements. They understand free-to-play mechanics on the existing platforms. A lot of the balance and game design risk that would be incorporated into “hit-driven risk” — finding those types of people when it comes to VR now, you’ll always been taken that risk. Signia is comfortable with that, perhaps more than many other VCs, fair-weather VCs within gaming.

We’re not blind. You’re obviously investing in teams that have a track record with successfully executing from a game design to a launch timing perspective in the past. We keep an eye to that when it comes to thinking about games and new distribution platforms now.

Where you can limit your risk relative to other VCs that are just riding the distribution wave with mobile or Facebook — now, when we’re looking at an early new platform, where it’s murky waters out there and we’re feeling our way through, diminishing what we can as far as content risk with an experienced team, one that’s done a MOBA before and can port that over to new platform, you limit that element of execution risk as much as you can going for those kinds of teams. That’s what we’re looking for.

Thompson: We’re looking at doing our first one.

Dhillon: It fits within that model.

GamesBeat: I worried at first that a lot of these people in game development were using VR as their lifeboat to get away from mobile. But hearing about Facebook investing $250 million and all the strategics — I didn’t anticipate that so much money would be coming in to help them along in the growth stage, early stage of the business. I see more of them surviving than I would have thought, just because they’re able to access some of this money from corporate and others.

Thompson: That’s only talking about games, though. There are other elements of content and entertainment, like filmed content, that have been getting venture money as well. Baobab, all these Pixars of VR that have been emerging for content.

The exciting near-term gaming monetizing opportunity comes in two things. One, it comes from VR arcades. You’ll see that as a big ramp-up, from what I saw in Japan a few months ago, in the Akihabara arcade area. It’s exciting to see some early experiments they’ve got with HTC Vives being filmed in mixed reality. It’s useful for spectators to be cheering on their friend hacking up zombies and so on. Arcades in general will see a resurgence as a near-term monetizing opportunity while headset penetration is still so low in the home.

Another one, within the home in particular, is PlayStation VR. The shipping numbers are pretty positive. 80,000 units sold in the first week globally was the last number I read. Next year’s Project Scorpio from Xbox, with developments such as asynchronous space warp that were announced at Oculus Connect 3, that require a machine to run content at a lower framerate—basically that means cheaper PCs, lower-end hardware, can run a Rift headset.

My guess, without being confirmed, is that the next iteration of the Xbox will be able to run a Rift headset and compete against PlayStation VR in a meaningful way with better controllers and tracking. Oculus hardware is proving to be a bit better there. That emerges as an interesting near-term monetizable opportunity for VR gaming. There will be more places to play, a larger penetration of hardware, than the PC-tethered, more expensive, more hardcore audience.

GamesBeat: I interviewed one former Call of Duty and Guitar Hero developer who’s using porn as his lifeboat. He says it’s where a lot of his fellow game developers are going.

Thompson: It’ll be interesting to see. Do the existing porn companies — I don’t know if I can name any, but I’m aware of some.

GamesBeat: He says all of them are diving into VR.

Thompson: They’d be missing if they didn’t. But do they dominate this, or do they create opportunities for new startups to have meaningful….

GamesBeat: They may create the opportunity for a wider user base. People will use it and VR gets into homes.

Thompson: It’ll drive headset sales.

GamesBeat: VR gets into homes and that benefits other companies.

Thompson: Do they still have those booths in San Francisco where you can go in and pop in quarters? You’re probably too young to remember. I can imagine the arcades you were talking about.

Dhillon: I was talking about a very different kind of arcades. [laughter] But you’re right. In the early days of a new platform, games and adult content are always going to be forms of content adopted by early adopters. There’s been a bunch of VR hackathons and stuff going on at Kink.com and elsewhere around the country. You won’t see traditional venture funding going into adult content, obviously, with pension funds as LPs and things like that. But in terms of innovation in monetization, managing community, influencer-driven outreach to audiences and so on, you might see some innovation in that space, sure. It’s a form of content that has a growing user base on a new distribution model like anything else.

Thompson: It’s like that little ditty from Avenue Q. “The internet is for porn.” It got a lot of play in the ‘90s.

Dhillon: When people were getting online for the first time.

Thompson: “VR is for porn” is going to be the next one.

Dhillon: Yeah, but it’s not a space that — I think a lot of the headsets also have walled gardens. Part of owning the hardware means owning the software store as well, the distribution store. Iribe and the Oculus guys have said that they’re not going to be closed to adult. Samsung has. It’s very family-friendly, with their Milk VR store. Vive is also more open.

GamesBeat: It looks like this is an opportunity for some alternative store just like with Google in China and all that. The different categories within VR, do you see anything taking off earlier than either games or medical and education and whatever? Or is it all taking off at once?

Dhillon: There are huge enterprise applications, huge medical applications, knowledge management applications. Without getting into specifics, if we believe this is going to become the next major computing platform — let’s say augmented reality taking the lion’s share, if you go off Digi Capital’s market size numbers. Every business that currently exists to facilitate our daily lives, and new ones, will emerge here that are native to this platform.

Let’s talk about VR ad networks for a second. We haven’t made an investment there, nor do we have an intent in the near term to invest in that space, though it’s raised significant venture funding. Immersive, Vertebrae, one or two others. When people pitched it to me, like Immersive, they said, “Oh, it’s one of the founders of Tapjoy that’s doing this. They obviously get ad tech.” I said, “Yeah, they get mobile ad tech.”

When it comes to what defines attention, what are the metrics that matter, what is the defensible tech — if anything — within a 360 video versus a volumetric light field room-scale experience versus a console cone of vision, limited range of motion experience, that kind of stuff has yet to be defined. It’s exciting, but I don’t necessarily think that previous platform experience in a business like an ad network necessarily puts someone in a better position.

Thompson: An easy example is print and television advertising. It did absolutely nothing to help someone in online advertising. A lot of people got hired, executives from the ad agencies, at big salaries in the early days of internet advertising, but those guys left at the door. They did not add any value. Which was interesting, but also points to how these new green fields are giving fresh starts for people.

Dhillon: Lifeboats for a lot of people.

Thompson: Yeah, and an even playing field. But the problem is, these guys in mobile may not have any advantage over somebody just coming out of school, or just thinking about it fresh, someone spending time with their headset.

Dhillon: Let’s think about filmmaking. When you think about the Spielbergs, the Lucases, the real visionary filmmakers of our time, and then you look at VR as an emerging medium, Spielberg has gone public several times saying it’s a confusing and scary medium. He’s an advisor to a couple of VR companies that he’s helping promote content through. What’s to say that young kids out of USC’s cinematic and writing programs are not going to be the ones to create that amazing first-time “my God you have to see it” experience?

Right now, the dollars to fund that kind of content are coming from brands, for the most part, experiential marketing dollars. If there’s a movie there will be some P&A advertising budget that will be used to finance a VR experience. The new talent that’s unencumbered by existing prior platform biases and norms and stereotypes, I’m really excited to see what they’ll be doing. The new crop of creators to build on what Rick was saying.

The same goes for games as much as anything else. But experience when it comes to building games is different from experience for doing a five-minute short for 360 video.

GamesBeat: I remembered something Oculus’ Jason Rubin said, that you have to fail a few times at a VR project before you might figure out what the real thing you need to build is.

Thompson: That’s a great thing to tell investors! [laughter]

GamesBeat: Some of the interesting part was — I’ve seen some of the learnings side by side. One game  used analog sticks to maneuver around in zero gravity. It was good, but it made me seasick.

Dhillon: I got sick on that one too.

GamesBeat: I thought about why I got sick. At Oculus Connect, Ready at Dawn had a game called Lone Echo. You’re using Touch and pulling yourself forward on things you can grab in space. You propel yourself, instead of just spinning all over. I didn’t get sick at all. It was a great experience. You could play Ender’s Game zero-gravity training. And it was exactly the same kind of game, just with a slightly different way to control things. I thought that was an interesting thing relating back to what Jason said. You can learn how to make something good here. It won’t be the same rules you had to follow the last time, but you can find them.

Dhillon: When you think of what input is, and the immersion that VR can create — when it comes to pupil tracking, bringing your hands into something, haptics, the sense of touch for example, it all adds — I think my first go-to genre is always horror games. I loved growing up playing Resident Evil and Silent Hill. I love horror movies.

Imagine you’re in a haunted house in a first-person kind of experience, like that game F.E.A.R. I remember playing that in college with the lights completely off, with the subwoofer turned up. You’d hear the pitter-patter in the surround sound of that The Ring-type girl all contorted running around behind you. She’s not there when you turn around. Then she’s there right in front of you, and it’s terrifying.

Imagine this in VR now, when she knows where you’re looking through pupil tracking. She’ll react different when she knows — you can’t ignore her. If you’re looking at her she knows it and she’ll react differently. Imagine a sense of haptics, so that you’re feeling minute differences of pressure in your hand, for example. You’re holding something, getting ready to cast a spell, whatever. You can feel hot and cold. We’re seeing startups dabble in this sort of stuff. You can imagine, in a full-on haptic experience — it’s not out of the realm of possibility that this could happen in the next five to ten year kind of horizon.

In the near term you’ll have hacked-together solutions that will be for purists and hardcore fans that will add to the level of immersion. But it really is a new input mechanism — using your eyes to control your character, using gestures to create a spell in mid-air. This hasn’t been done before.

Thompson: This all sounds very expensive. We’re talking about $100 million for a console game now, but we’ll be talking about billion-dollar developers eventually.

GamesBeat: It seems like the people who master the medium will be able to produce hits, though. More so than people who are just trying to figure it out.

Thompson: It’ll quickly become very capital-intensive, in spite of Unreal and Unity’s attempts. It’s getting really expensive. Those will be big productions. Don’t you think?

Dhillon: Totally agree. What we start to see — when people buy a PlayStation now, they’re excited to try — have you played Batman? People want to be Batman, is how they position it. It’s this first-person action-RPG thing and you feel like you actually step into the role of Bruce Wayne. You’re selling people on the fantasy at that point. It’s a four-hour experience. It’s not that long. It’s not a fully robust explore-the-world-of-the-Elder-Scrolls endless giant MMO capacity.

That’s really expensive. When you’re building a living world, that’s like Peter Molyneux used to talk about with Lionhead. The trees growing from a sprout to an oak in the time you go from this land to that land. A living, pervasive, breathing world is super exciting. We’ve seen a couple of companies doing a lot of distributed cloud compute to help these environments and worlds be more detailed and interactive and destructive. I’m excited, but I think it’s another four or five years before we see games with that level of living worlds coming to life.

GamesBeat: I’m interested in this idea of science fiction inspiration. You have Ready Player One. There’s a lot of things out there that were once science fiction and now don’t seem so far away. It seems like science fiction might be becoming relevant in a way that tech investors maybe never used to care about. I remember this quote from Will Wright  — “Everybody’s business plan in Silicon Valley is a dog-eared copy of Snow Crash.” Things like Second Life came out of these visions. We have Westworld now, which everyone’s very excited about. I wonder what your own view of that is. Have you seen a lot of ideas to look for in science fiction that are also probably not as far away as we maybe thought?

Thompson: A few examples come to my mind. You can go back to Orwell or Ray Bradbury and paint some darker pictures. What is humanity and civilization going to be like when we don’t have jobs anymore?

Dhillon: Do we all end up becoming the future in WALL-E, floating around in hover chairs? This is one of our favorite conversations, when we talk about science fiction inspiration and how it’s being realized in today’s world. Think about Star Trek, with the real time universal translators. A company in New York right now called Parrot uses natural language processing to hear and translate, in real time, conversations between people of different European Romance languages.

GamesBeat: You should get a sci-fi author on board as a partner.

Dhillon: Come in as chief futurist. AOL has one, you know. His name is David Shing. He does these hilarious Nostradamus-style forecasts of the future. You have to get a look at one of them.

GamesBeat: I think I heard him speak once.

Dhillon: Seeing him is something else, once you see what I’m talking about. But yeah, it’s very exciting, when you can use a science fiction archetype as a quick condensed view of, for example, what a startup is pitching. It’s a pretty cool initial hook.

GamesBeat: It seems like some of these very sci-fi-like things are going to remake a lot of industries. If you apply deep learning to everything that’s out there, all the old things that don’t use it become obsolete. The ones that do become much better at doing whatever they need to do.

Thompson: Like figuring out what needs to be done! [laughs]

GamesBeat: If you don’t have a deep-learning neural network behind your marketing tech….

Dhillon: Our colleague Linus Liang was teaching a big data class at Stanford before he joined us. He has incredible insights. He’s been bringing me up to speed on some of this stuff from a 101 perspective. CNN’s deep learning, the difference between all of it. I read an article on TechCrunch about “WTF is machine learning?” and then it builds on itself over time and gets to deep learning at the very end.

GamesBeat: With the different opportunities, are you looking at VR or the game subset within VR compared to other categories that are more or less attractive, like maybe A.I. in general?

Thompson: It’s all interesting. We’re still doing stuff toward autonomous cars. That’s huge and transformational. We’re trying to invest in themes that will give us a half-dozen or a dozen investments, big movements. With A.I., it seems like that’s mostly applications for transforming a lot of existing things. Where does the application of the technology create something new, something disruptive to existing players? There are those opportunities, but they’re not as obvious. You don’t just invest in A.I. anymore, as a thing. It’s usually as a tool.

GamesBeat: AI almost seems like table stakes for some future products.

Thompson: One thing I worry about, a lot of this technology is reinforcing existing players, the power they have. If you’re Amazon, you can become really hard to compete with. They have that much more data and ability to be much smarter than another retailer. That’s why Wal-Mart bought Jet. They need to do something pretty quickly, because they don’t know nearly as much about their customers as Amazon does. Amazon leverages that data.

Dhillon: And upsells you on everything. Everything brings you back to putting stuff on your basket. An added suite of services with Amazon Prime. Video on Prime. Delivery benefits. Keeping you within the Amazon walled garden. Now with Echo. I’m a vociferous user of Echo. To the point where I don’t think — even if Google Home Hub was double the speed, double the accuracy, I still don’t think I’d switch off, because I’ve become so glued to its efficiency. “Order more kitchen towels. Order my Uber.” I’ve become so used to the syntax of talking to it. I go to hotel rooms and I still do that when I walk in, out of habit.

Thompson: It’s huge returns on scale, what these technologies really mean, more than being able to create new businesses in these spaces. It’s all about the data.

GamesBeat: How do you think about platforms and whether you can maneuver to open platforms or help create open platforms? I saw a project out of Stanford that was concerned about social being a closed platform. They started a project and wound up doing a new social layer for games that’s the only social layer available for Pokemon Go right now. They didn’t necessarily want one company to own social, so they did some research. They came up with Omlet Arcade.

Thompson: I’d love to get on that kind of project. Right now, Netflix, Amazon, Apple, Facebook, they own all our data. They resell it to market back to me. Ultimately, why can’t it be my data? I’m the owner of it, we’re each the owner of our own data, and we choose to pool it and make it available on a level playing field to whoever brings us the best service. That should be able to happen, in theory.

GamesBeat: So a world of open platforms is fundamental to having good startups.

Thompson: That’s one of the problems with mobile. We’ve given up the web, so we’re tethered to AT&T.

Dhillon: Same thing goes now when you look at the evolutions within iOS 10 and iMessage, turning it into a WeChat kind of model. Is messaging going to become the new browser? Are GIFs going to become the new medium of expression for a millennial audience? A picture is worth a thousand words. There’s a reason emoji have risen on the back of mobile, with the people that use it.

Whether Echo or Home or any of that stuff — with voice becoming a new input device for you to interact with stuff, rather than tapping and pushing and gesturing, there’s a whole new season of walled ecosystems that’s emerging. More competition is better for developers, obviously. But there’s nothing — the most free one in VR is probably Steam. You have the least constraints as a developer to distribute the content you want to on Steam, as opposed to working with PlayStation, for example.

GamesBeat: If you want to circle back and direct game-specific entrepreneurs in some way, the kind of pitches you get, what would be some of the things you’d say? You’re not as interested in mobile, but you’re interested in VR.

Dhillon: We’ve been fairly public with our views. We’re unlikely to do another new mobile gaming investment. It’s super early for VR gaming, although we are starting to take it very seriously. There’s a deal we’re looking at right now in that space.

Thompson: But we’re not necessarily out there looking for a lot more.

GamesBeat: You already get enough pitches as it is?

Thompson: If we see something really exceptional — there will be exceptional, interesting teams, and we’d like to hear about them.

Dhillon: There’s plenty of other enabling technology that can contribute to games, but also the cinematic and short-form VR experiences. The infrastructure layers, laying the cable kind of areas. That will probably fit more firmly within our remit right now for where VR and AR and MR are at. Companies in the portfolio that represent that are 8i, down in Los Angeles and New Zealand, specialists in hologram capturing and rendering technology, and Eonite, which is a great example of best-in-class positional tracking that will master opportunities for inside-out, getting rid of the need for light stations in the future. Companies like that, in the infrastructure layer, are interesting for us still, within VR. We think there’s an opportunity there.

Thompson: At the same time, the chances of building a multi-billion-dollar company there — it’s not obvious. They ultimately fall into the risk of being middleware.

Dhillon: The likelihood there is a lot of these highly technical-driven teams that are incredibly specialized in computer vision applications, for example—the major platforms are likely to need that kind of expertise in the near term. A firm like Signia, with our fund size and our return expectations, we understand that it’s a great learning opportunity to see, when you’re selling picks and shovels, who’s going to be using them, for when more margin-generating businesses like content become an opportunity. You know where to look at that point. In the near term you can still protect your down side with these technical teams that are likely to get lapped up for $100-200 million, when you look at the supposed valuations Apple puts on the teams it’s bought.

Thompson: Either they likely sell at some point, or they become irrelevant.

Dhillon: Exactly. Finding out the right time for that and positioning in the right way is paramount.

Thompson: Applications and use of VR are something we’re interested in, too. Sunny mentioned already that for AR and VR, outside of gaming is probably bigger, sooner, faster.

GamesBeat: Do you think any particular regions are ahead? Seattle, San Francisco, Los Angeles, China?

Dhillon: Scandinavia, the way it emerged — Finland emerged with Angry Birds and so on. Outside of the heart of virtual reality, which is Silicon Valley — Facebook created the industry by buying Oculus for that big price tag. There are pockets in China and Japan that have been impressive. Incumbent filmmaking communities have been emerging. Anywhere there’s major tech hubs, VR is getting interest from developers, investors, and brands alike as something to explore, something new and shiny.

I was blown away by what I saw in China at a VR conference in April. I came back and wrote a bit about it. In Japan more recently as well. Gaming is the first go-to area for both of those locales. Here in America we’re seeing a broader range of applications within VR. Health care, enterprise training, business use cases and so on. Plus cinematics. Definitely seeing a lot going on in Japan and China that I thought was invigorating to see, global enthusiasm behind this. You have guys like HTC and Oculus having global hubs and global presences, promoting developers to go on their platform at the same time.

Thompson: Back to the open platform. Do you see open platform initiatives? The Stanford project, is that still alive?

GamesBeat: I think so. We also have OSVR, which seems to be coming up behind. Valve seems to express an interest in making sure that the platforms out there stay open. I don’t think they would have done Steam VR if Oculus had not gotten bought by Facebook.

Thompson: Part of the problem — if we had a market that had half a dozen smartphone manufacturers in the U.S., somebody would break the cartel. They’d say, okay, 20 percent fee on the app store, or give rebates to developers to go there first and create that race to the bottom. But with two companies it’s an oligopoly. Neither one will ever break it.

With VR, is there a hope that with this many headset manufacturers out there, they’ll basically bust the walled gardens open?

Dhillon: It goes to show — when we talk about mobile headset manufacturers, there are more than 100 Chinese manufacturers that I came across, all doing basic versions of Cardboard or Gear. They’re all running on Android at the same time, though. The phones slot in.

Thompson: Within the smartphone — I’m so dependent on it. That’s my desktop. It’s my light. It’s my connection with my family. It’s hard for me to break from Apple. Will VR be different, in the sense that, hey, I can switch from one to another? As soon as another generation comes along, I don’t have to have that stickiness, because I don’t have my life signed into that like with my phone. If that’s the case, I think there’s hope for much more of a — I buy the hardware and the software as a commodity.

Dhillon: If you think about AR or VR and you’re leveraging this as your source of compute, you’re very limited right now by what smartphones can do as far as framerate and battery life. The one we’ve not yet discussed here — if the experience is as compelling as people predict what Magic Leap will provide, it’s exponentially ahead of what any phone-tethered experience can do. I find it hard to believe that people will ever abandon their smartphones to live within a….

 

GamesBeat: I do wonder one thing about where the headsets are going and where the technology is going. Moore’s Law tells you it’s all inevitable. But then at the Oculus Connect event, Mike Abrash gave an interesting talk where he said that it’s not just Moore’s Law that makes things inevitable. That’s a myth. It’s really smart people doing the right engineering at the right time to make something happen earlier than you thought was possible. Then we brought up the wireless headset that Oculus showed — 

Dhillon: You tried it, right? You’re one of the few people who’s tried it.

GamesBeat: Yeah. It seems very cool. I suspect they didn’t show me the giant battery they intend to attach to it at some point in time. I had it on for only five minutes. But they’re arguing that you can make some of these things happen sooner.

Thompson: It’s Moore’s Law combined with capitalism. Capitalism means people exploit it.

GamesBeat: Capital does give it that important nudge.

Thompson: Being a U.S. citizen, we are really fortunate that these powerhouses are all headquartered here. If I were living in Luxembourg or Belgium, I’d be really unhappy about having to pay all those taxes to the IP holders and these software companies just for the air I breathe. We’re able to collect global revenue. We may not repatriate it all, but it’s very powerful.

GamesBeat: Do you think you’re looking for either the people who understand Moore’s law or the people who want to beat Moore’s Law? They want to bring the future to us sooner.

Thompson: There’s a problem in being too early. Jaron Lanier, he was a little early.

Dhillon: He works at Microsoft now, and he’s actually fairly bearish on the current wave of VR. When you’ve been told you’ve cried wolf so many times, when it hits you’re probably not going to believe yourself anymore. There’s been a few. You see at the VR conferences, a few of these fringe guys who’ve been hanging around the VR space since before it was really a thing, for years or decades. Giving validity to fringe opinion isn’t necessarily….

Thompson: I was in speech recognition in the ‘80s. I was aware of work that had been done back in the ‘60s and thinking, “Now is the time!” We kept working on it with smart people, but the processing power just wasn’t available.

GamesBeat: Masayoshi Son said it’s at the level of human accuracy now, speech recognition, and vision recognition is getting about as good.

Dhillon: Voice recognition, yes, in the English language, when you look at natural language processing. I think that Alexa has just been launched in German. But all the natural language processing stuff — there’s tons of open source stuff out there for computers to understand intent, enunciation, variation in accents and so on. That’s what Echo and Siri and all the rest are built on.

Similarly, when we talk about being too early, Blockbuster.com could do what Netflix does: deliver electronic sell-through of digital content. It just took 10 hours to download with limited broadband speeds, and the cost of doing so was high. It didn’t work. Similarly, when talk about being too early in the mobile ecosystem, like the iFund — how many of those companies ended up becoming mobile platform-defining winners?

The problem with being too early is you don’t know you’re too early. Taking a very measured approach to not going all in — I don’t think it makes sense to be a large sector-focused VR fund right now, because getting your returns in the near term, where your IRR and other metrics that you determine success on — that’s going to be challenging, if you’re a large-scale fund. If you’re a little fund it might work. When it comes to being too early, how much do you concentrate in a space where there’s contention and contradictory views?

GamesBeat: It seems like you want to be able to maneuver. You don’t want to have a giant fund, a billion-dollar fund or whatever with a lot of partners slowing you down.

Thompson: There are certainly advantages to being nimble. We’re still investing over three years. We’re being very picky. We don’t feel the burden of a calendar, the days flying by. If we go six months, that’d be okay.